June market update and investment risks

The following reflects the general views of our Treasury & Investment Office (T&IO) and should not be taken as a recommendation or advice as how any specific market is likely to perform.

These views are as at the end of June 2022.

The value of investments can go down as well as up. Investors could get back less than they put in.

Please remember that past performance is not a reliable indication of the future performance.

Overview

Fears of an imminent recession in the US and Europe, brought on by months of rising inflationary pressure which dented consumer and business confidence, gathered steam during the quarter. Business surveys for the month of June pointed to a sharp deceleration in the growth of the global economy, as manufacturing and services sector activity slowed among the world’s leading economies. Economic damage from the war in Ukraine has been a significant factor in the slowdown and has greatly exacerbated the global inflation problem. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest. The worsening inflationary picture necessitated a more aggressive pace of interest rate hikes from many of the world’s central banks.

Equities (or shares)

Having treaded water through April and May, UK equities succumbed to a sell-off by global stocks in June. This also left the domestic market below the waterline for the first half of the year, although ahead of the major global regional market’s ex Japan in local currency terms. The UK’s resilience reflects the market’s defensive characteristics, relatively cheap valuation, attractive yield and the high proportion of energy, mining, pharmaceutical and bank stocks in its composition.

US equities suffered their biggest declines since the arrival of the coronavirus pandemic. Investors struggled to assess the impact of moving from a low to a high inflation regime and this led to volatility.

European equities fell heavily as growing concerns about a global economic recession curbed investor risk appetite. Amid persistently high inflation and signs of slowing economic activity, investors worried that central banks’ plans to raise interest rates would lead to an economic slowdown.

The Japanese stockmarket fell, like many other markets. Notable was the weakness of the Japanese yen, which fell against most major currencies.

What do you mean by Equities?

  • Equities are commonly known as "shares". When a fund buys a company share, it is investing in a company and, in exchange, receives a share of the ownership of that company. Shares give two potential investment benefits:

    • share prices may increase as the value of the company increases.

    • companies may pay dividends - regular payments made to shareholders based on how well the company is doing.

What are the general risks of this type of asset? 

  • Over the longer-term (over 10 years), equities are considered to offer greater growth potential than many other asset types. However, the value of any investment can go down as well as up and so there is a higher risk of losing your original capital than investing in fixed interest securities (see below).
  • The financial results of other companies and general stock market and economic conditions can all affect a company's share price, and consequently the value of any fund investing in that company.

Fixed interest

The second quarter saw further steep declines across fixed income markets, largely driven by fears that persistently high inflation would necessitate an even more aggressive series of rate hikes from the world’s central banks. Against this backdrop, UK government bonds (gilts) delivered negative returns as the 10-year gilt yield climbed sharply from around 1.7% at the end of March to around 2.2% by the end of June. UK corporate bonds were also in negative territory.

Global bond markets continued to display an uncertain direction because of international events, high inflation, the threat of slowing growth, and interest rate volatility. Bond yields, rose on major government bonds, investment grade corporate bonds, and lower-rated high yield bonds. Emerging market bonds also fared poorly.

What do you mean by Fixed Interest?

  • Fixed interest securities, more commonly known as "bonds", are loans issued by companies or by governments in order to raise money.

  • Bonds issued by companies are called Corporate Bonds, those issued by the UK government are often called Gilts or UK Government bonds and those issued by the US government are called Treasury Bonds.

  • In effect, all bonds are IOUs that promise to pay you a sum on a specified date and pay a fixed rate of interest along the way.

  • Index-linked securities are similar but the interest payments and redemption value are normally increased by a price index e.g. for UK government index-linked securities, interest payments and redemption value are increased in line with the UK Retail Price Index.

What are the general risks of this type of asset

  • On the whole, investing in Government or Corporate Bonds is seen as lower-risk than investing in equities. To date, no UK government has ever failed to pay back money owed to investors. But with Corporate Bonds there is a risk that the company may not be able to repay its loan or that it may default on its interest payments.

  • Corporate and Government bonds are sensitive to interest rate trends. An increase in interest rates is likely to reduce their value, and hence the value of any fund investing in them.

Property

UK commercial property made a solid start, with real estate investors seemingly unperturbed by the gyrations seen in other asset classes. All sectors recorded a positive total return in April and May, although gains moderated somewhat from those seen over the first quarter. This has been achieved against a backdrop of rising inflation and a steep upward trajectory in interest rates (the Bank of England raised rates to 1.25% in June). So far in the quarter industrials and retail have seen the strongest capital growth, with the recovery in retail primarily driven by retail warehouses. In the office sector, investor interest is focused on good quality stock, whereas more compromised assets from the perspective of “green credentials” remain out of favour.

What do you mean by Property?

  • For our funds we would mean commercial property investment. This generally means the fund is sharing in the returns from the ownership of some buildings (for example, offices and shopping centres).

  • The value of the property may increase and tenants may pay rent to the owners of the building.

What are the general risks of this type of asset

  • Property can be difficult to buy and sell quickly. Fund managers may have to delay withdrawal of money by customers from a property fund until they can sell some of the buildings the fund invests in.

  • The actual value of a property is what someone is prepared to pay for it - an actual sale value. As sales are infrequent, interim valuations are based on a valuer's opinion and may be revised up or down from time to time. This can affect the value of a fund invested in commercial property, with the value possibly fluctuating significantly and could result in an investor not getting back the amount they originally invested.

  • This leads to a number of risks for funds investing in property:

    • Cash could remain uninvested as property assets can be difficult to buy, leading to lower returns than expected.
       
    • The value of the fund may be reduced if a large number of withdrawals are requested and it is necessary for properties to be sold at reduced prices.

    • There may be delays removing your money from the fund if property cannot be sold.

    • Property fund valuations may be revised periodically, upwards or downwards.

    • Rental income is not guaranteed. Defaulted rent and unoccupied properties could reduce returns.

    • If the size of the fund falls significantly, the fund may have to hold fewer properties, and this reduced diversification may lead to an increase in risk.

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